• Trim FV; remain buyers on limited headwinds, valuation We trim our fair value 7% to SAR52, mainly to reflect a higher Saudi risk-free rate. We remain buyers of Budget Saudi (44% upside), as its investment case remains intact with solid earnings growth visibility (+8% Y-o-Y in 2016e) on: i) continued fleet expansions (+c8% per annum); ii) addressing a wider market base through a new representation (“Payless”, discussed below); iii) focus on corporate clients (particularly through trucking venture Rahaal); and iv) limited impact from KSA subsidy changes vs. other consumer stocks under coverage. Moreover, valuation is undemanding at c11x 2016e P/E vs. peers’ c14x. Also, stake trimming by largest shareholder Zahid Group, which has been an overhang on share price performance, has eased significantly (none since 3Q15).
• Fleet guidance intact, to introduce Payless brand by year-end Budget Saudi will sustain fleet expansions with long-term and trucking fleets to see growth of c10% and c14%, respectively, given still-strong demand by corporate clients, outpacing the short-term division’s c5% on its relative saturation. We are positive on Budget’s new representation of the “Payless” brand (as of May 2016) that will cater to a different, less-penetrated market segment: car renters on a budget. Initial contribution will be small (c500 vehicles or c2% of fleet in 2016; lower investment cost/vehicle), and the franchise will be run separately out of different offices (10-12 locations by year-end), but will enable the company to increase its customer base at a time when clients are becoming more cost-conscious.
• Limited cost pressures; gains on used car sales to improve The company is expecting some pressure from higher energy prices and other reforms as it receives no direct subsidies. Also, exposure to the public and oil and gas sectors is fairly low (c6% of revenue). On another note, gains on used car sales are expected to be stronger this year (+10% Y-o-Y), given the end of a purchase and resale agreement that deflated numbers last year, as well as no signs, thus far, of a slowdown in used car demand or pricing pressures.

Nada Amin
Hatem Alaa, CFA